In an attempt to cool the UK’s property market, the Bank of England has announced measures to introduce even stricter affordability checks and limit the amount of higher risk loans offered to borrowers.

In its Financial Stability Report, the Bank of England Financial Policy Committee (FPC) stated: “The recovery in the UK housing market has been associated with a marked rise in the share of mortgages extended at high loan to income multiples. At higher levels of indebtedness, households are more likely to encounter payment difficulties in the face of shocks to income and interest rates.

Bank of England governor Mark Carney

“This could pose direct risks to the resilience of the UK banking system, and indirect risks via its impact on economic stability. The FPC does not believe that household indebtedness poses an imminent threat to stability. But it has agreed that it is prudent to insure against the risk of a marked loosening in underwriting standards and a further significant rise in the number of highly indebted households.”

Bank of England Governor Mark Carney added that the outlook for household indebtedness was of a concern. He said: “Although UK households have made progress in repairing their balance sheets, they start from a vulnerable position, with debt at 140% of their disposable income. The share of mortgage lending at high loan-to-income ratios has increased markedly over the past year to a record high. Given the momentum in the housing market, and the underlying shortage of housing supply, it is likely that this trend will continue.”

– When assessing affordability, mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, Bank Rate were to be three percentage points higher than the prevailing rate at origination.

– The Prudential Regulation Authority and the Financial Conduct Authority should ensure that mortgage lenders limit the proportion of mortgages at loan to income multiples of 4.5 and above to no more than 15% of their new mortgages.

WHAT’S THE VERDICT?

The Bank of England’s actions has naturally raised the debate over the UK’s economic strength and its overheated property market, we round up the expert reactions to the institution’s announcement below:

Treasury Select Committee chairman Andrew Tyrie MP

“The measure alone is already an important signal. It demonstrates the Bank’s preparedness to use a financial stability tool as an insurance against the risk of overheating. It is a major departure for the UK.

“Two years ago the Bank seemed somewhat coy about using tools that targeted loan to income ratios, questioning whether there had been sufficient debate to make their use acceptable to the public. The Bank has now signalled that it may act vigorously to head off the economic and financial stability risks that may arise from an overheating housing market. It will ration some high loan-to-income mortgages from October. The more the market were to overheat, the more this measure could bite.

“Further use of tools such as these could, in the long run, have a big effect on millions of people. The FPC, a relatively new body, is still largely unknown to the public. It is therefore important that it does everything it can to explain its decisions. The Treasury Committee will be seeing members of the FPC on 15 July with that in mind.

MoneySuperMarket.com editor-in-chief Clare Francis

“The key to a healthy housing market is stability. A stagnant market is as unhealthy as one that is overheating, so the aim is to achieve a balance which enables people to both get on to the market, as well as move up or down the property ladder as and when they need or want to.

MoneySuperMarket’s Clare Francis

“Lenders have a role to play in this, and they need to ensure that mortgage applications are thoroughly evaluated. Recent changes mean that they now have to scrutinise affordability more closely than they did in the past, and the proposed measures announced today should reinforce these obligations further. I am, however, still unsure as to whether these proposals will actually have a huge impact on the state of the market, even in London where prices are rising the fastest.

Building Societies Association head of mortgage policy Paul Broadhead

“On the face of it the loan to income cap will have little immediate effect. However it is important that the bank has chosen to consult. This type of blunt instrument is untested in the UK market and there is a risk of unintended consequences, particularly for first time buyers. This group naturally need to borrow at higher income multiples, and can do so provided they meet affordability criteria. It is important that they aren’t pushed towards more expensive credit, despite being able to afford a mortgage.

“The Bank of England has tools to moderate demand in the housing market, but can’t affect supply. For decades successive Governments have failed to address the problem of housing supply which is the single biggest issue we face.”

Council of Mortgage Lenders director general Paul Smee

“The new affordability stress test that requires lenders to check their borrowers’ affordability against an assumed Bank rate 3% higher than at origination will clearly ensure resilience to shocks.

“Limiting the level of a lender’s lending to no more than 15% of new mortgages at 4.5 times income or above (and none at all for Help to Buy guaranteed loans) is likely to impact the London market more than elsewhere. Nationally, 9% of new loans are at 4.5 times income or more, but the figure is 19% in London.

CML director general, Paul Smee

“It’s important not to confuse these measures, which are designed to ensure financial and economic stability, with wider housing policy, for which the Bank is not responsible. Additional housing supply to help correct the imbalance between supply and demand is the main way of relieving affordability pressure and household indebtedness attributable to mortgage borrowing over the long term.”

Estate agency the House Network director and co-founder Graham Lock

“Rising house prices are rightly being scrutinised but the Bank of England’s plans to ‘cool’ the housing market are a dangerous ploy that have the potential to backfire.

Yes, London and the South-East have blazed a trail in recent months and years but prices across the rest of the country haven’t risen anywhere near as aggressively. Natural market forces will dictate and as a nationwide online estate agent, we’re already hearing slight rumblings of demand slowing and prices stabilising. The Bank of England trying to manipulate the market could cause panic and volatility to develop as people worry about the value and saleability of their homes.”

Threadneedle Investments head of multi-asset allocation Toby Nangle

“The planned measures by the Bank of England to cap certain, high loan-to-income mortgages were more cautious than the market had anticipated, and the new stress-tests that they announced will raise the bar across the industry to best practice standards already in place amongst major lenders. House builders have reacted positively in the equity market, and the Pound Sterling strengthened a touch on the likelihood that macroprudential regulation will slow the freight train of housing which appears to be powering the UK economy. The BoE seems keen to stress that it is not targeting high property prices, instead seeking to head-off problems that lenders may encounter later on when they approach the 15% of new business mark (currently 11% of banks’ new mortgage business is being written at 4.5 x income or higher).”

The fact is a holistic approach is required to credit whether it be mortgages, hire purchase, credit card debt, personal secured or unsecured loans an of course overdrafts.

A formula needs to be devised whereby all the above are taken into account for an individual before more credit is granted. Moreover, “affordability stress tests” of a 3% increase in rates across all forms of credit the applicant has needs to be applied and then, and only then should a loan be granted if the stress test is passed.

The solution to the housing crisis is manifold and lies with re-instating existing derelict houses and brown sites alongside a strong immigration policy – come here to work if you are youngish, healthy and have the skills we seek.

The final strand in the housing crisis solution lies with social security – all child based benefits to be means tested and after a years notice, means tested social security only to be paid in respect of the first child of each family born after a predetermined date.

The housing crisis is a result of overpopulation encouraged by inverted Victorian values. Until these values are confronted the problem will remain. The UK is already overbuilt hence increased flooding and developers building in flood plains as there is nowhere else to build. Green belt land needs to be maintained and added to with the UK population being managed down over the next hundred years.